2nd home location: Sonoma Coast or SF Bay area?

Question

I am thinking about buying a second home.  I will retire in maybe 15-20 years, and would like to live in the Sonoma Coast part time if not full time.  So I need a property there.

I'm thinking about buying it now; hopefully the property tax will be lower than when I buy it in 15-20 years.  But the region's price appreciation seems to lag behind SF Bay area.  I'm in a real dilemma.  Should I buy at the coastal area now, or should I buy in SF Bay area now, then in 15 years switch over to coastal area?  Can you give me some pros and cons?

Robert Fisher · Answer

Thank you both for a very scientific perspective and a very philosophical perspective.  I think I will go ahead and purchase my coastal property now, and try to generate income out of it before I retire; gonna be tricky managing that from afar.

Arlen Chou · Answer

@Robert Fisher

I read your question more about a choice between a "life style" decision and an investment decision.  A second home that will eventually become a retirement/permanent residence is very different than a home that would be used as a rental that would later be sold to purchase a final residence.  If you are going to buy that final residence home, I would look for the the place that I want to live and not so much worry about the appreciation of the property.  It is a lifestyle choice decision.  However, if I were to buy a home in the BA as an investment that would later be sold to buy a home, I would be looking for a appreciation and rent-ability.

You are looking at fairly affluent areas for a "second" home, so I am going to make the assumption that your current income level is fairly high.  If that is the case, I would go with the purchase in my target retirement area now.  My reasoning is that retirement income levels, for most people, usually go down or at best stay flat.  Therefore, I would want to lock in lower expenses when my finances are fixed in retirement, via prop 13.

Assuming you don't need the income through an active rental property, you can also "test experience" you retirement location over the next 15-20 years.  That is a really long period of time to be projecting out for a final location and who knows what life will bring between now and retirement.  But at least if you get to that point and you still like the location, you will have locked in property taxes that can be planned for in your retirement budgeting/planning process.

Either decision you make, it is great that you are thinking about this decades before your actual retirement.  That is some serious planning you are doing!

Good luck,

Arlen

Mel Selvidge · Answer

Hi, Robert.  Are you looking to buy a primary residence in the Bay Area or to get an investment-only property here?  My pros/cons below assume the former.

FWIW, I'm hosting a meetup on Wed. in Berkeley to compare the costs/benefits of renting vs. buying, and we'll look at factors like appreciation, property tax over time, and inflation.  I'm also a vacation rental owner (and have been looking to get another in the Sonoma area too...love it there!) and would be happy to look at how you project that type of income with you.

Here are a few pros/cons off the top of my head:

Pros:

Buying in Sonoma coast area:

• Strong vacation rental market relative to price in some areas
• Existing services for marketing and maintaining a vacation rental property
• Prop 13 will keep your taxes lower for the long haul (as you noted)
• It's where you want to be and end up, so whether or not it's a great cashflow or appreciation investment, it will be valuable to you.

Buying in Bay Area:

• It's where you live.
• It might be cheaper than rent,
• If you buy at a fixed rate, the future affordability more assured in 10 or 20 years than rent, assuming that both rent and home values go up as they historically have.
• It will likely cashflow like gangbusters if and when you decide to move to Sonoma for retirement.
• At retirement, you're likely (historically) to have equity that you can pull for a future Sonoma purchase as well as cashflow from the home if you hold it and rent it.
• Lower interest rates, more loan products (i.e. FHA, other low down payment options), and some sources (Fannie Mae Homeopath first dibs) are only for owner-occupants.

Cons:

Buying in Sonoma coast area:

• Rents on non-vacation rentals are low.
• If you do vacation rental, it can be time intensive and expensive to operate, depending on how you run it.
• If you rent in the E. Bay, there will be rent increases over time. 
• Higher interest rates and more down payment required for non-resident/investment property.

Buying in Bay Area:

• What you can afford to buy might not be as nice as what you can afford to rent, even if the numbers work out in favor of buying.
• Rent control and transient rental restrictions may complicate future options for using it as a rental.
• Higher local property tax special assessments that are not capped by Prop 13.
• Market is very hot.

I'm not too far away from you though, and I'd be happy to exchange ideas in person.

2nd home location: Sonoma Coast or SF Bay area?

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